Inefficient Continuation Decisions, Entry Costs, And The Cost Of Fluctuations

Fluctuations in firms revenues reduce firms survival chances and are costly from a social welfare point of view even when agents are risk neutral if the decision to continue operating a firm is not efficient so that fluctuations lead to inefficient reductions in firms life expectancy and the shortening of firms life expectancy reduces firm entry due to (for example) the presence of entry costs. Conservative estimates for the per-period costs of moderate fluctuations, like business cycles, are between 0.18% and 2.12% of GDP, but some calculations result in estimates exceeding 30% of GDP.